Hence, investment proposals are to be evaluated in terms of both expected return and risk. Capital budgetingalso involves replacement decisions.
Financing decision is the second important function in finance department. It is to decide,where from and how to acquire funds to meet the firms investment needs. The central issue here is to determine
the appropriate proportion of equity and debt. The mix of debt and equity is known as the firm‟s capitalstructure. The firm‟s capital structure is considered optimum when the market value of shares is maximized.
Dividend decision is the third major financial decision. The finance manager has to decidein what proportion the firm has to distribute the dividends. The proportion of profits distributed as dividends iscalled the dividend payout ration and retained portion of the profits is known as the retention ratio. The
optimum dividend policy is one that maximizes the market value of the firm‟s shares.
Investment in current assets affects the firm‟s profitability and liquidity. Current assets
management that affects a firm
s liquidity is yet another important finance function. Current assets should bemanaged efficiently for safeguarding the firm against the risk of illiquidity. Lack of liquidity in extreme
situations can lead to the firm‟s insolvenc
y. A high rate of investment in current assets would provide liquiditybut it would lose profitability. As, the current assets would not earn anything thus, profitability
liquiditytradeoff must be maintained.Finance functions are said to influence production, marketing and other functions of the firm. Hence, financefunctions may affect the size, growth, profitability and risk of the firm and ultimately value of the firm.
Role of a Financial Manager:
A financial manager is a person who is responsible, in a significant way, to carry out the finance functions. Itshould be noted that, the financial manager occupies a key position. Finance managers functions not confined topreparing, maintaining records and raising funds when needed. He is now responsible for shaping fortunes of the enterprise, and is involved in the most vital decision of the allocation of capital. He needs to have broaderoutlook and must ensure the funds of the enterprise are utilized in the most efficient manner.The main functions of financial manager are,Funds raising: During the major events, such as promotion, reorganization, expansion or diversification in thefirm that the financial manager was called upon to raise funds.Funds allocation: A number of economic and environmental factors, such as the increasing pace of industrialization, technological innovations, intense competition, increasing intervention of government onaccount of management inefficiency and failure, have necessitated efficient and effective utilization of financialresources. The development of a number of management skills and decision-making techniques facilitated the
implementation of a system of optimum allocation of firm‟s resources. As a result, the emphasis shifted from
raising of funds to efficient and effective use of funds.Profit planning: The functions of the financial manager may be broadened to include profit planning function.Profit planning refers to the operating decisions in the area of pricing costs, volume of output and the f
selection of product lines. Profit planning is a prerequisite for optimizing investment and financing decisions.Understanding capital markets: Capital markets bring investors and firms together. Hence, the financialmanager has to deal with capital markets. He should understand the operations of capital markets and the way inwhich it values the securities. He should also know how risk is measured and how to cope up with the risk ininvestment and financing decisions.